Owners spend months on the number in the offer letter and a few weeks on the document that determines what they are actually paid. The gap between those two figures is rarely small, and it is created almost entirely in the sale and purchase agreement — in the price mechanism, the warranties and the money held back after completion. This is a guide to the mechanics, written for sellers rather than for lawyers.
From the offer to the amount you receive
Offers are usually made on an enterprise value basis, meaning a value for the business itself, before its financing. What arrives in the shareholder’s account is the equity value, and the route from one to the other is known as the price bridge.
- Enterprise value, as agreed with the buyer.
- Less net financial debt — loans, leases, factoring and anything the buyer treats as debt-like, including unpaid taxes, unfunded bonuses and shareholder loans.
- Plus or minus the difference between working capital at completion and the agreed normal level.
- Less amounts held in escrow or deferred, which are received later or not at all.
- Less transaction costs and, depending on the jurisdiction and structure, tax on the gain.
Each of these lines is negotiable, and each is negotiated after the headline number has been agreed, when the seller has already committed emotionally to the sale. That sequencing is the single most important thing to understand about how sale prices erode.
Locked box or completion accounts
Two mechanisms fix the moment at which the price is calculated. Under a locked box, the price is set on the basis of a historic balance sheet — often the last audited year end — and the seller undertakes that no value has leaked out of the company since that date other than in agreed, permitted ways. The buyer usually pays interest on the price for the period between that date and completion.
Under completion accounts, the price is provisional at closing and adjusted afterwards, once accounts are drawn up as at the completion date. A locked box gives the seller certainty on the day, provided the historic balance sheet is clean and the leakage definition is tight. Completion accounts reflect the actual position on the day, at the cost of a post-closing negotiation that the buyer usually controls, because the buyer prepares the accounts and by then owns the finance function.
The working capital target
This is where value moves most quietly. The buyer proposes a normal level of working capital the business should be handed over with, and the price is adjusted by the difference between that target and the actual figure at completion. If the target is set half a million euros above the genuine average, the price falls by half a million euros, and nothing in the headline number changes.
Sellers should insist on a target derived from a documented twelve-month average, adjusted for seasonality, with one-off items and any period distorted by the sale process excluded. A business that collects most of its receivables in December and is sold in October will hand over an unusually low working capital position for reasons that have nothing to do with performance, and the calculation should say so.
Warranties, disclosure and indemnities
Warranties are statements of fact about the company — that the accounts are accurate, that the tax filings are complete, that there is no undisclosed litigation, that the key contracts are in force. If a warranty turns out to be wrong, the buyer can claim against the seller. Anything the seller discloses in writing before signing is carved out of that protection, which is why the disclosure letter matters as much as the warranty schedule.
Four numbers frame the seller’s exposure, and they are worth negotiating as a package rather than one at a time.
- The cap — the maximum aggregate claim, commonly a percentage of the price for general warranties, with tax and title warranties often capped higher.
- The de minimis — the size below which an individual claim cannot be brought at all.
- The basket or threshold — the aggregate level claims must reach before any of them can be recovered.
- The survival period — how long each category of warranty stays live, typically shorter for commercial warranties than for tax.
Where diligence has surfaced a specific known problem, the buyer will ask for an indemnity instead, which pays out on the loss without the seller being able to argue about materiality. Indemnities are the right place to spend negotiating effort: a warranty cap protects against the unknown, while an indemnity is a known cost that has been moved onto the seller. Where the parties want to close the gap without the seller carrying it, warranty and indemnity insurance is available in this region and is increasingly used on mid-market deals.
Escrow and deferred consideration
Part of the price is often held in an escrow account for a defined period, to be released if no warranty claim is made, or applied against one if it is. Sums held in escrow have been agreed but not received, and the seller carries the risk of the release conditions until the period expires. The points to negotiate are the amount, the length, what triggers a release, who pays the escrow agent, and whether the interest accrues to the seller.
Deferred consideration and earn-outs work on the same principle — payment conditional on something happening later. We have written separately about earn-outs; the discipline is the same in both cases, which is to treat conditional money as a discount to the price until the condition is met.
The gap between signing and completion
Most transactions do not sign and complete on the same day. Merger control clearance, third-party consents, bank waivers and change-of-control provisions in key customer contracts all take time, and the agreement has to say who bears which risk while they run. Buyers ask for material adverse change protection and for covenants restricting how the business is run in the interim. Sellers should ask what happens if a condition is never satisfied, whether there is a long-stop date, and whether anything is payable if the buyer walks away for a reason within its own control.
What to settle before exclusivity
- The price mechanism — locked box or completion accounts — stated in the letter of intent, with the reference date named.
- The definition of net debt, including which items the buyer intends to treat as debt-like.
- The basis on which the working capital target will be calculated, in writing, before the exclusivity period begins.
- The expected shape of the warranty package: cap, escrow amount and duration, as indicative ranges.
Everything above is easier to agree while the buyer is still competing for the company. Once exclusivity is granted, the seller has surrendered the only leverage that reliably moves these terms, and each of them is worth a percentage of the price. This is general commentary and not legal or tax advice; the mechanics vary by jurisdiction and by structure, and every sale agreement should be negotiated with counsel and an adviser who have seen the same clauses fail before.